Wednesday, October 01, 2008

Turning Good Renters Into Bad Homeowners

Much of the current credit crisis can be blamed on the fact that U.S. public policy (and monetary policy) encouraged excessive homeownership (tax deductibility of mortgage interest, government creation of GSEs, forcing the GSEs to promote subprime mortgages, enacting the CRA, historic low mortgage rates in 2003, etc.), and in the process we turned "good renters into bad homeowners."Here's an idea about how good renters becomes bad homeowners. Wouldn't it be the case that greater financial discipline is typically imposed on a renter than a homeowner? And isn't it typically the case that financially irresponsible behavior might be tolerated to a greater extent, and for a longer period, by a mortgage company than by a landlord? For example, consider a renter living paycheck-to-paycheck, with weak credit, and monthly rent of $800. Faced with the threat of eviction within a few months of non-payment of the rent, most renters would make the rent payment a fairly high priority to avoid eviction. Also, the renter would typically be dealing directly and personally with either the landlord or a property manager, someone they would probably know by name.Now if that tenant becomes a howeowner, possibly because of the availability of subprime lending and the CRA, several things happen. First, the renter-turned-homeowner is now making monthly mortgage payments by mail to a bank or mortgage company, often in another part of the country, and is no longer dealing directly with a landlord or property manager. Second, the the homeowner no longer faces the threat of almost immediate eviction (or within a few months, depending on the state) for non-payment of the mortgage. According to this foreclosure timeline from Bankrate.com, foreclosure and sale of a property can take up to 415 days (more than 13 months) after a mortgage payment is late (depending on state law), and it might take even longer for the eviction process. Knowing that non-payment of the monthly mortgage to a faceless company in another state won't result in eviction for possibly a year or more, wouldn't the new homeowner act much more irresponsibly as a homeowner than as a tenant? That is, wouldn't the significantly greater default-foreclosure-eviction time frame for homeowners compared to tenants encourage more reckless behavior, and turn a good tenant making regular monthly rent payments into a bad homeowner, with delinquent monthly mortgage payments? And even if the "bad homeowner" doesn't default completely, late mortgage payments might be tolerated more by the mortgage company than late rent payments would be tolerated by the landlord.

My husband ended up having to rent a property after a housing bubble burst in Ontario. Every month, it was like pulling teeth to try to get the rent. Getting a good tenant was something we never achieved.

When my husband was suffering from severe heart problems, he rented our main residence and moved into a condo. The tenant did not pay for 6 months and caused thousands in damages. He declared bankrupcy but had paid his rent so was not obliged to inform us that he had gone bankrupt. We rent through the regular courts and learned by accident that he had declared bankrupcty which would require going through a totally different set of courts. He and his wife agreed to leave voluntarily on the condition that there would be no judgement against them. Both were in their 50s and had owned a home previously (they also stiffed the real estate agent on the commission of said home). I recall this gentleman calling our offices to harass my husband who was in intensive care recovering from bypass surgery.

Good renters? That's a matter of opinion. I guess people can spot someone that they can con.

There is more to this crisis than turning good renters into bad homeowners. Some of these financial institutions have leverage rates of as high as 30:1. That is not a function of credit worthiness of sub-prime lenders but of excessive risk taking on the part of the financial institution.

I think the point is that in most states, it's easier to deal with bad renters than bad homeowners. Obviously bad renters and bad homeowners are both bad. The difference is that, in my state, evicting a renter is a simple matter of going and filing a claim at court, they deliver the notice to the tenant, then, after a given amount of time, the sheriff is authorized to set the tenant's belongings out, usually within just a few weeks (with varying specifics from county to county). Foreclosure from the time of default on the mortgage to the actual property sale can take months (or possibly a year like the example given). Also, the costs incurred evicting a bad renter are far lower than costs incurred in foreclosing on a bad homeowner.

Bad homeowners in sufficient numbers affect their neighbours, banks, shareholders, bank employees, and potentially taxpayers who end up picking up the tab.

To be balanced, we also have to consider that the decision to loan or not was a choice. The decision to leverage assets through securitizing mortgages and selling them to get capital to make more loans over and over creating scantily capitalized houses of cards another choice. Failing to rein in these securitized vehicles was a choice. Keeping interest rates at a historic 50 year low for an extended period of time, etc., etc.

There were many bad choices that were made. Anyone who saw the problems in sub-prime mortgages or securitization got short shrift from the industry and the beltway.

We had the perfect storm of rising interest rates, rising mortgage payments, falling house prices and foreclosure which destroyed the market for securitized mortgages overnight severely impairing the ability of financial institutions to raise capital.

Now, we have to figure out the best way out of this mess. This is really 2 different problems that must be solved: sub-prime debacle and a problem of excessive leveraging/insufficient capital that goes beyond sub-prime mortgages.

Spot on! As a renter and a former mortgage paymenter (?), If I had to pay a mortgage now (for the same amount), I wouldn't. I'd love to have a free ride for a year and catch up on some bills. However, I know my lessor and there's no way I would back out of my monthly payments to them. My friends have taken the free ride/democrat route and they just end up renting in the end anyway.

Supply of labor is inelastic, so the supply stays about the same even if wages are kept low. Given three decades of stagnant US wages concurrent with substantial gains in US productivity, how does a consumer economy expand? Credit. While probably not a corrdinated effort, business and government have fed the public credit instead of wages to keep the public consuming. Perhaps it is time to reconsider. I do not belong to a union, but people in my profession who do make substantially more.

Quite frankly, I hate people who give vent to their loquacity by extraneous bombastic circumlocutions, don't you, my incognito floccinaucinihilipilificator?

P.S., did you have any actual ARGUMENTS to profer to support your imbecilic, emptyheaded and pointless naysaying, or were you just demonstrating your casual disregard for the complete waste of precious electrons?

> How about in the home big ticket items such as a washer, a dryer, or a stove?

Actually, those hit about $200 for the dryer and have pretty much never dropped much lower, which, let's face it, is about as primitive as tech can get -- A steel box, a perforated steel drum, some bearings and hinges, a heating element, a fan motor, a drum motor, and some reostat controls -- not a single thing there which could not have been built in 1910.

Can anyone explain to me why it is that this is about 3x the price of a piece of extreme precision equipment like a laser jet printer?

Even with the "after the fact" sales of cartridges and stuff figured in to make it a loss-leader, it's hard to believe the price differential.

I dunno about stoves and washers, but dryers ought to be about $30+S&H (which isn't figured into the $200 fee)

re: "A steel box, a perforated steel drum, some bearings and hinges, a heating element, a fan motor, a drum motor, and some reostat controls -- not a single thing there which could not have been built in 1910.

Can anyone explain to me why it is that this is about 3x the price of a piece of extreme precision equipment like a laser jet printer?"

1 - Printers companies make their profits from the consumables. Some printers can be dirt cheap (I've even seen free with rebate). Its all about the consumables except perhaps for the pricier printers, and they cost more than a dryer not less.

2 - A dryer has a lot more material. Than all but very large printers.

3 - A dryer's production may not be as automated as that of smaller electronic items.

4 - Its not as complex or advanced, but complex and advanced doesn't always mean expensive. A computer chip is very complex but except for some high end chips they are pretty cheap to produce (the plants to produce them are very expensive, but they can churn out a lot of them). The relation between total complexity and cost to produce is far from a straight linear one for one relationship even when all other factors are equal. And the correlation between when a technology was invented and the cost to produce today may be close to zero. "Could have been built in 1910" is close to meaningless in determining the price something cost to build, or how much it can sell for.

5 - Dryers do have components that could not have "been built in 1910". More and more consumer devices have computer controls. Not that they add much to the cost, so this isn't a big factor, but your "could have been built in 1910" line is false as well as being irrelevant (see #4 above)

> 2 - A dryer has a lot more material. Than all but very large printers.

It's mostly bloody sheet metal. What's the price per *pound* in very large quantities? C'mon.

> 3 - A dryer's production may not be as automated as that of smaller electronic items.

You ARE kidding, right? How complex does the assembly line to put together a dozen parts need to be? Sure, the robots are physically bigger, but that's it.And there's no precision involved at all. Things are off in a dryer by an 1/8th of an inch, it's NBD.

Hell, there's probably a lot more screws in the printer than there are bolts in the dryer. Each one is one more step in the manufacture to add to the cost.

> 4 - Its not as complex or advanced, but complex and advanced doesn't always mean expensive.

You miss the point -- the TOLERANCES involved in the dryer are, as mentioned, in the 1/8th of an inch range at worst, mostly distinctly larger than that.

Probably EVERY tolerance in the printer is in the sub-millimeter range, and some are in the 10 micron range.

> "Could have been built in 1910" is close to meaningless in determining the price something cost to build, or how much it can sell for.

Wrong. Tolerances tie to what percentage of failures, returns, and defects are produced on any production line. Chips themselves are cheap despite the ridiculous tolerances for the simple reason that the stuff is basically carefully dirtied SAND, and there are a huge mass of them done on each run... so 50%-90% failure is NBD and part of the automated testing process.

Mechanisms require assembly and fitting. Anything out of round, warped, and otherwise ill-fitting means toss it. When that's large, like a 5 inch plastic part, you ain't tossing away a small lump of sand costing hundredths of a cent, but something costing pennies each. That adds up.

OTOH, when it comes to manufacture of something like a dryer, the fact that the current tolerances are in the millimeter range for manufacturing means that the number of errors in dryer unit manufacture will be damn near zero.

> 5 - Dryers do have components that could not have "been built in 1910". More and more consumer devices have computer controls. Not that they add much to the cost, so this isn't a big factor, but your "could have been built in 1910" line is false as well as being irrelevant

So your argument is that some manufacturer out there, somewhere, could not possibly ignore these computerization trends and just make one which has no need for such potentially(according to you, or at least that appears your point) massive expense-adding parts to produce a unit which is cheaper by nearly an order of magnitude?

So, in summary, you have one vaguely valid point which is identical to one I already made:

> 1 - Printers companies make their profits from the consumables.

I quote myself:Even with the "after the fact" sales of cartridges and stuff figured in to make it a loss-leader, it's hard to believe the price differential.

I just find it hard to believe that they can ignore the kind of price differential that ought to exist, assuming that dryers *are* priced accurately, to sell printers at that kind of loss. Sales of a couple cartridges a year means you get to wait 2 years before you show a profit on a laser printer sale?

"It's mostly bloody sheet metal. What's the price per *pound* in very large quantities? C'mon."

Its mostly, but not 100% sheet metal. And even having more sheet metal adds some to the cost, not just initial material costs, but also handling and distribution costs, inventory costs (it takes up more space) etc.

And its not just more material, but more moving material. Large moving parts tend to cost more than most electronics in today's economy, unless the electronics are very new, or unusually powerful.

"> 3 - A dryer's production may not be as automated as that of smaller electronic items.

You ARE kidding, right? How complex does the assembly line to put together a dozen parts need to be? Sure, the robots are physically bigger, but that's it.And there's no precision involved at all. Things are off in a dryer by an 1/8th of an inch, it's NBD."

No I'm not kidding. Although I'm also not sure about this one, notice "may not be as automated", not "is less automated".

The robots, being physically biger also contributes to the capital and operations cost for the factory (perhaps not total costs, but certainly per unit produced). Again probably a modest increase but a number of modest increases added together can be significant.

As for the tolerances, your right that they are looser, although perhaps not to the /18th of an inch extent. The balance has to be right as it turns, and if there is a gap clothes can get caught in that gap and tear or burn (I know this from personal experience, as well as reading about the problem)

"> "Could have been built in 1910" is close to meaningless in determining the price something cost to build, or how much it can sell for.

Wrong. Tolerances tie to what percentage of failures, returns, and defects are produced on any production line."

And "tolerances" are not "could have been built in 1910. Pretty much two separate issues. Yes we can build things with tighter tolerances now, but that doesn't make the issues the same. Also we can build things with tight tolerances for much less today than in the past. Its not as expensive to make tight tolerances.

"> 5 - Dryers do have components that could not have "been built in 1910". More and more consumer devices have computer controls. Not that they add much to the cost, so this isn't a big factor, but your "could have been built in 1910" line is false as well as being irrelevant

So your argument is that some manufacturer out there, somewhere, could not possibly ignore these computerization trends and just make one which has no need for such potentially"

No the point is that most manufactures don't do that. I never said or implied it was impossible to do that.

In any case this is probably the least important point in terms of costs. As I've already pointed out simple electronic controls or commodity computer chip controls aren't all that expensive.

"I just find it hard to believe that they can ignore the kind of price differential that ought to exist"

1 - The price that "aught to exist" is whatever the market will bare, not the cost of production.

2 - Low end printers are likely to cost less to produce and distribute than dryers.

The role of CRA has been ridiculously overstated: at my bank, the CRA population has performed BETTER than its share of the population. It is the "investor" (flipper) population & their misrepresentation as owner/occupiers that really blew up. Not the renter population.